STRATEGIC PARTNERS
Several speakers at this week's Thomson ATM & Debit Forum, including Robin Nenninger of U.S. Bancorp and Kevin Reager of Bank of America, gave their take on what it will take for financial institutions to survive in the increasingly tough world of off-premise ATMs.
October 24, 2002
For the first time in its history of presenting EFT-oriented trade shows, Thomson Media combined ATM and debit in one event, the ATM & Debit Forum (subtitled "Payment System Optimization") held earlier this week in Baltimore.
Thomson Financial program director Rob Farling told the approximately 430 attendees, "It was time to catch up with the industry and merge these two topics into one."
After attending four presentations en masse -- three of which focused on the network and transaction processing sides of the business -- attendees split into ATM and debit "tracks."
On the debit side, topics included rate structures for PIN-based debit, co-branded cards, loyalty/rewards programs and electronic payroll cards.
Across the track (actually, a room divider) on the ATM side, attendees heard about financial institutions outsourcing off-premise programs to ISOs, early innovations in voice-guided ATMs and a bank's successful use of CDPD (cellular digital packet data), among other topics. Several speakers focused on the sometimes harsh realities of running off-premise ATM programs.
'Right sizing' networks
Robin Nenninger, an executive vice president and director of ATM Banking at U.S. Bancorp, kicked off the ATM Track saying that with Triple DES and ADA mandates approaching, she feels like "it's Y2K all over again."
Those mandates, combined with the slow death of the OS/2 operating system, make long-range decisions more important than they've ever been, Nenninger said. "Sometimes you have to go slow to go fast. Look at the steps necessary to get your network where you want it to be in five years."
In contrast with the deployment-happy 1990s, Nenninger said the early 21st century is an ideal time for "right sizing" ATM networks.
"It's time to retrench," she said. "With the regulatory challenges, it's a critical time for us to be responsible and say some of these locations may not be keepers."
Screen scene
Nenninger showed several examples of U.S. Bank ATM screens, which offer cardholders the opportunity to change their PINs, order checks or make a variety of purchases, including mini-statements, stamps, prepaid long-distance or tickets for local festivals.
"You can satisfy the customer by offering instant gratification at the ATM," she said.
"It's time to retrench. With the regulatory challenges, it's a critical time for us to be responsible and say some of these locations may not be keepers." |
The light blue screens feature a backdrop of stars, to remind customers of U.S. Bank's Five Star Guarantee. Implemented in 1996, the guarantee means $5 is credited to a customer's account any time the bank fails to live up to its five service tenets, one of which is 24/7 availability of ATMs.
U.S. Bank has created special co-branded screens for several of key ATM site partners, including Dodgers Stadium in Los Angeles, the Churchill Downs racetrack in Louisville, Ky., and the Holiday Stationstores gasoline/c-store chain. Dodgers Stadium has even expressed interest in selling game tickets via ATMs.
It's all about relationship building, Nenninger said. "It's not expensive to do, and it delights your customer base."
Screen and receipt messages advertising bank products and services are switched every two weeks to coordinate with branch promotions. Customers heed them, Nenninger said. "When we have a phone number on the receipt and the wait screen, they do call."
She urged all financial institutions to update their ATM graphics and "get rid of the green screens."
Complex climate
Kevin Reager, a senior vice president at Bank of America, gave a brief historical overview of the off-premise ATM business, focusing on the impact of surcharging, dial-up communications and lower-cost cash dispensers.
The introduction of these items created what Reager called an "overheated" market, with hyper-aggressive financial institutions and ISOs. He referenced a few ill-fated deals of the time, including a 1999 partnership between Card Capture Services (now E*TRADE Access) and First Union Bank (now Wachovia) to put 500 ATMs in Hollywood Video stores that was scrapped about six months after it began.
(See related story CCS, First Union pull ATMs from Hollywood Video)
That led to a climate of correction, Reager said, with a few prominent bankruptcies (Credit Card Center, InnoVentry) and plenty of buying and selling of portfolios.
Financial institutions that are still active in the off-premise market today face a more complex environment, Reager said, with ISOs as their major competitors as well as new players (such as eFunds) that don't fit the traditional ISO model.
"If you went back four years ago, financial institutions were (Bank of America's) major competitors. Now, we rarely run into other FIs," he said.
They want it all
Retailers have become more demanding, Reager said. "Simply putting an ATM out there as a cash dispenser isn't going to work," he said, because retailers expect an ATM to drive store traffic by offering new products and services to ATM users.
Some retailers want near-total control of an ATM program, with the right to select the hardware, telecommunications and service providers, Reager said. Branding has become a hot-button issue, with some retailers wanting a co-brand, others only their brand, and still others no brand at all.
"The idea of (the financial institution) brand being pristine is going to require some adjustment," Reager said.
"Some of your best deals will be those you turn down." |
Among the features that financial institutions must provide to earn quality deals, Reager said, is on-line reporting. Though FIs have been slow to adopt it, ISOs have long given their clients access to real-time ATM data.
"Retailers want to feel they play a part in managing their portfolio," he said. "They don't want to wait until the 20th of the following month to compare transaction volumes."
Deployers also will need to be a market leader -- or close behind -- with new ATM products and services such as check cashing, shared deposits and prepaid phone time, Reager said. Because many retailers have existing relationships with service providers such as Western Union or MoneyGram, deployers must maintain the flexibility to work with multiple vendors.
Reager said that clauses will become a key part of future contracts, with stricter deadlines for fulfilling promises about new products and clear repercussions if deadlines aren't met.
"Warm and fuzzy isn't going to be enough anymore," Reager said. "If an RFP requires you to dispense plastic phone cards within 90 days and you can't do it for six months, it's going to be a problem. Something is going to happen to you if you don't meet that promised timeframe."
Perhaps Reager's biggest message was: "Don't fall in love with a deal, but be willing to walk away. Some of your best deals will be those you turn down."
Reager likened ATM negotiations to an auction, noting that it's easy to get caught up in the process itself. "You can spend a lot of time working the numbers and trying to justify the deal. It's a lot like an auction where you go in having decided the fair value of a chair is $90, but you walk out having spent $240."
Looking ahead
Looking ahead to the next three years, Reager predicted that consolidation will continue in all ATM business areas and that alliances -- surcharge alliances, outsourcing agreements, agent bank agreements and processing agreements -- will become more common.
He believes that only a limited number of deployers will be able to offer new products because the costs to upgrade will be prohibitive for many. Web-based technology will offer the best upgrade path, he said. "It will be tough finding ways other than the Web to get the function and flexibility you will need."
He outlined three possible strategies for ATM programs over the next three years: Do nothing, invest in the infrastructure or form strategic partnerships.
Those who do nothing, Reager said, will face more competition from those able to offer enhanced ATM functionality. This will impact not only the ability to win new deals but also the ability to retain existing ones.
"For the ISO whose business is primarily selling to mom and pop, continuing to deploy cash dispensers will be just fine," Reager said, "but for most people, that's not going to be the case."
Investing in infrastructure will be "very expensive," Reager said, but will likely pay off for those willing to do so (among them Bank of America, which is in the midst of upgrading its 12,500-machine network to what it calls an "advanced technology platform," with Pentium processors and Windows NT operating systems).
Put 'er there, partner
Interest in the strategic partnership alternative is growing, as evidenced by a panel discussion entitled "Partnerships to Improve Off-Premise ATMs," in which three panelists provided their take on these new kinds of partnerships. They were: Doug Deitel, Cardtronics executive vice president of corporate services; Sandra Hartfield, president and chief executive officer of Palm Desert National Bank's Electronic Banking division; and Gary Walston, Momentum Cash System's vice president of sales and marketing.
Moderator Tony Hayes, director of Dove Consulting, noted that all banks outsource their ATM programs to some degree today, whether it's service and maintenance, cash management or ATM driving.
Increasingly, however, financial institutions are taking more dramatic steps. Nearly 20 financial institutions are participating in an agent bank program run by Cleveland, Ohio-based Key Bank; the Co-Op Network is attracting new members with surcharge-free ATMs offered through a shared access deal with Access Cash; and large ISOs like Cardtronics and Momentum Cash developing special programs for financial institutions.
(See related stories Building on the installed base and One great union)
The panelists agreed that cost control in off-premise locations was the single biggest reason that banks turned to ISOs for help in managing their programs. Deitel noted that Cardtronics, with 9,000 ATMs under contract generating 50 million transactions a year, can bring down its expenses through scale and demand better rates from vendors than most other deployers.
More conference |
Depending on the types of locations and the hardware, Walston said Momentum can operate a turnkey off-premise program at about half the cost that a bank can.
Although Palm Desert often provides vault cash, Hartfield said some banks provide their own cash but have Palm Desert manage it. "We manage cash levels, settlement, paying vendors and all the rest. You save a significant amount by not having to devote employees to doing all of that in-house."
Cost structures for financial institutions will vary, depending on what services a bank receives from an ISO, the panelists said. In some cases, ISOs will install and maintain bank-branded equipment for financial institutions. In others, such as Momentum's Toll-Free ATM Network, they simply offer surcharge-free access to existing retail ATMs to bank customers in a specific market area.
To make up for the loss of a surcharge on "on-us" transactions, it's typical for a bank to pay either a flat monthly fee or a per-transaction fee to an ISO.
"It's not like selling a suit off a rack," Deitel said. "Many banks like to pay on a per-transaction basis. That way they only pay when their customers derive value. Others don't like that fear of the unknown. They'd rather know the cost upfront."
